NEW YORK ( TheStreet) --Shares of Citigroup ( C) are attractively valued, but investors should be willing to have a longer term horizon to reap the benefits, according to Sanford C. Bernstein analyst John McDonald.

In a note Friday, the analyst reiterated his outperform rating on the stock with a price target of $55, presenting a 100% upside from current levels.

But some of the positives for the stock that he listed out in the report will likely play out only over a two-to-three year period.

In the medium term, it is unlikely that Citigroup shares will trade at a premium to book value, the analyst opined in a note Friday.

According to McDonald, Citi's profitability targets for its core franchise ( a return on assets of 1.25% to 1.5%) is not immediately achievable, as it would take a long time to achieve "normalized" returns across its business segments. Meanwhile Citi Holdings- the bank's non-core assets- accounts for 17% of the assets and will continue to depress overall returns for the bank.

Citi is also likely to generate significant excess capital which it could potentially return to shareholders, but that promise is at least two years away. The bank is still behind its peers such as JPMorgan Chase ( JPM) in meeting regulatory capital standards under Basel III.

Still, from this point on, the analyst expects the bank to add to its capital levels at a rapid pace. McDonald estimates Citigroup would have $35 billion in excess capital by end of 2013 and an additional $25 billion in 2014. "For those investors willing to look down the road toward the '13 and beyond horizon, Citi's excess capital generation and deployment looks quite large relative to its current market cap," the analyst noted.

Citi along with Bank of America ( BAC) is yet to receive approval from the Fed to make buybacks and meaningful dividend increases. The analyst however expects that Citi's "quickly improving capital position" will make it likely that the Fed will give management a green light regarding capital return to shareholders in 2012. "The Fed (and Citi) may be conservative in the magnitude of these actions in 2012, but we expect the size and pace of Citi's capital return to pick up significantly in '13 and beyond," wrote McDonald.

In the near-term, the bleak economic picture is likely to present headwinds to the bank and its peers. Citigroup might, however, be better placed than its peers to weather an extended low interest rate environment, the analyst argued.

Although the bank derives a greater than average proportion of its income from net interest income, Citi has greater flexibility to lower funding costs by reducing high-cost debt. The bank is targeting a $50 billion reduction in long-term debt through 2012.

It also derives a significant portion of its revenues from emerging markets where it can earn a higher yield.

Other positives for the stock in the near term include a lower mortgage litigation and putback risk relative to peers and lower real-estate exposure overall.

--Written by Shanthi Bharatwaj in New York

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